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Dynamic Materials Earnings Leave Investors Thunderstruck

The maker of explosive components and welded products gave shareholders a mixed picture.

The new energy boom in the U.S. has largely involved looking in previously untapped areas for oil and natural gas and using previously untested techniques to extract those products from the ground. In pursuit of that goal, Dynamic Materials (NASDAQ:BOOM) has proven invaluable by offering a variety of explosive components and clad-metal materials to withstand some of the toughest conditions in the world. Nevertheless, Dynamic Materials left investors feeling a bit shell-shocked when the company released its third-quarter results, as its sales and earnings show a huge divide between the company's two major divisions. Let's take a closer look at how Dynamic Materials did last quarter and what it means for the energy industry.

The gulf between Dynamic Materials' two big businesses

Source: Dynamic Materials.

On the whole, Dynamic Materials fell short of what investors had expected to see during the third quarter. Revenue fell by 1% to $51.9 million after reflecting the removal of the AMK Technical Services business, which was sold at the beginning of October. Even after allowing for the lost revenue from the AMK divestiture, Dynamic Materials' sales fell well short of the 2.5% gains that investors had expected. Moreover, on the earnings front, net income from continuing operations fell by about 25% to $0.18 per share. Even after using the company's preferred adjusted EBITDA metric, Dynamic Materials suffered about a 12% drop.

Yet just as we saw last quarter, Dynamic Materials saw much different performance from each of its two major segments. The DynaEnergetics oil-field products segment, which makes the explosive components and systems that help energy companies perforate their oil and gas wells in order to boost production, saw continued strong growth. Sales for the segment jumped 29% from year-ago levels to $28.3 million, with the company citing the popularity of its DynaSelect switch detonator system as driving the sales growth. Operating income more than doubled from last year's third quarter, and adjusted EBITDA gained more than 75%.

On the other hand, though, the NobelClad explosion-welded metal products segment saw considerable weakness that overshadowed DynaEnergetics' success. NobelClad's sales fell 22% to $23.6 million, with Dynamic Materials saying that poor levels of capital expenditures among the segment's global industrial customers contributed to the shortfall. Operating income fell by almost two-thirds, and adjusted EBITDA was cut in half. Order backlogs rose slightly from second-quarter levels, but it's nevertheless clear that NobelClad's struggles from earlier in the year continue.

Source: Dynamic Materials.

Can Dynamic Materials bounce back?

Despite the concerns, Dynamic Materials seemed upbeat about the results, even at its metal-products division. CEO Kevin Longe said that he's "optimistic about the long-term prospects at NobelClad," citing efforts to streamline its operations and the recent purchase of a manufacturing facility in Germany that could boost capacity and serve a greater number of customers.

Looking forward, though, Dynamic Materials' latest guidance doesn't suggest a rapid return to high growth. CFO Michael Kuta said that full-year 2014 revenue would likely come in down slightly to up as much as 2% after reflecting the sale of AMK Technical Services. For the fourth quarter specifically, Dynamic Materials hopes for sales growth of 4% to 6%, with improving gross margins hopefully boosting the company's bottom line. Investors had been hoping for a 13% to 14% increase in revenue from year-ago levels, and although full-year projections were somewhat more realistic, Dynamic Materials shareholders could end up being disappointed by those final figures as well.

For now, as energy markets continue to be roiled by large declines in crude-oil prices that have sent West Texas Intermediate below the $80-per-barrel level, Dynamic Materials could be vulnerable to further pressure. Given how much the company has relied on the support of its oil-field services division to prop up its ailing other segment, Dynamic Materials can't afford to see a reversal of favorable trends in the energy markets that could cause its more successful business to slow down as well. Investors need to keep a close eye on price action in the commodities markets to ensure that Dynamic Materials' customers can keep spending enough to lead to continued revenue and profit growth for the explosives-maker.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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